10

- C

- i APPENDIX 10

- C. NATIONAL NET PRESENT VALUE OF CONSUMER BENEFITS
USING ALT ERNATIVE PRODUCT PRI CE FORECAST

TABLE OF CO NTENTS

10

- C.1 INTRODUCTION

................................ ................................ ............................... 10

- C

- 1 10

- C.2 DATA EVALUATION AND ANALYSIS

................................ ......................... 10

- C

- 1 10

- C.3 NET PRESENT VALUE RE SULTS USING ALTERNAT IVE PRODUCT PRICE TREND

................................ ................................ ................................ .... 10

- C

- 4

LIST OF TABLES

Table 10

- C.3.1 NPV Using Alternative Product Price Forecast, Discounted at 3 Percent, for Furnace Fans Used in HVAC Products Other than Hydronic Air Handlers (billion 2011$)

................................ .................... 10

- C

- 4 Table 10

- C.3.2 Comparison of NPV Under Alternative Product Price Forecasts, Discounted at 3 Percent, for Fur nace Fans Used in Non

- Weatherized Gas Furnaces (billion 2011$)

................................ ................................ ... 10

- C

- 5 Table 10

- C.3.3 NPV Using Alternative Product Price Forecast, D iscounted at 7 Percent, for Furnace Fans Used in HVAC Products Other than Hydronic Air Handlers (billion 2011$)

................................ .................... 10

- C

- 5 Table 10

- C.3 .4 Comparison of NPV Under Alternative Product Price Forecasts, Discounted at 7 Percent, for Furnace Fans Used in Non

- Weatherized Gas Furnaces (billion 2011$)

................................ ................................ ... 10

- C

- 6

LIST OF FIGURES

Figure 10

- C.2.1 Historical Normalized Prices of Warm Air Furnaces

.............................. 10

- C

- 2 Figure 10

- C.2.2 Historical and Projected Total Shipments of Warm Air Furnaces

.......... 10

- C

- 2 Figure 10

- C.2.3 Relative Price versus Cumulative Shipments of Warm Air Furnaces, with Power Law Fit

................................ ................................ .................. 10

- C

- 310

- C

- 1 APPENDIX 10

- C. NATIONAL NET PRESENT VALUE OF CONSUMER BENEFITS
USING ALT ERNATIVE PRODUCT PRI CE FORECAST

10

- C.1 INTRODUCTION

The net present value ( NPV ) results presented in chapter 10 reflect a product price trend based on historic prices of electric motors. DOE also investigated the impact on the NPV for the considered C SLs for furnace fans of a product price forecast based on the experience curve approach

. In DOE’s 2011 furnace standa rds rulemaking, it derived a forecast of furnace prices based on an analysis of the historic trend in the producer price index (PPI) for furnaces. In th e sensitivity analysis described in this appendix , DOE applied the experience curve developed for furnaces to the price of furnace fans.

The extensive literature on the “learning” or “experience” curve phenomenon is typically based on observations in the manufacturing sector. a In the experience curve method, the real cost of production is related to t he cumulative production or “experience” with a manufactured product. This experience is usually measured in terms of cumulative production. A common functional relationship used to model the evolution of production costs in this case is :

Y = aX - b

where a is an initial price (or cost), b is a positive constant known as the experience rate parameter, X is cumulative production

, and Y is the price as a function of cumulative production. Thus, as experience (production) accumulates, the cost of prod uci ng the next unit decreases. The percentage reduction in cost that occurs with each doubling of cumulative production is known as the experience rate (ER), given by:

ER = 1

– 2 - b

In typical experience curve formulations, the experience rate parameter is d erived using two historical data series: cumulative production and price (or cost).

10

- C.2 DATA EVALUATION AND ANALYSIS

To derive a n experience rate for furnace fan products, DOE obtained historical Producer Price Index (PPI) data for furnaces from the Bureau of Labor Statistics’ (BLS). For warm air furnaces, DOE used PPI data spa nning the period 1990

- 2010

. An i nflation

- adjusted price index for warm air furnaces was calculated by dividing the PPI series by the Consumer Price Index (CPI) “all items” index for the same years. Th is inflation

- adjusted price index (shown in Figure 10

- C.2.1 ) was used in subsequent analysis steps.

a Weiss, M., Junginger, H.M., Pat el, M.K., Blok, K., (2010a). A Review of Experience C urve Analyses for Energy Demand T echnologies. Technological Forecasting & Social Change . 77:411

- 428

.10

- C

- 2 Figure 10

- C.2.1 Historical Normalized Prices of Warm Air Furnaces

DOE assembled a time

- series of annual shipments for 1953

- 2009 for furnaces using data from AHRI and the Gas Applian ce Manufacturers Association. For furn aces, shipments prior to 1953 were extrapolated backward based on a linear trend to the historical shipments. The annual shipments data were used to estimate cumulative shipments (production). Projected shipments after 2009 were obtained from the base case projections made for the NIA (see chapter 9 of this TSD). Figure 10

- C.2.2 show s the shipments time series used in the analysis.

Figure 10

- C.2.2 Historical and Projected Total Shipments of Warm Air Furnaces

To estimate a n experience rate parameter, a least

- squares power

- law fit was performed on the unified price index versus cumulative shipments ( See Figure 10

- C.2.3 )

. 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0

1920 1940 1960 1980 2000 2020 2040 2060Annual Total Shipments (millions)

Year Historical
Projected
Extrapolated10

- C

- 3 Figure 10

- C.2.3 Relative Price versus Cumulative Shipments of Warm Air Furnaces , with Power Law Fit

The form of the fitting equation is:

P(X) = P o X

- b

, where the two parameters, b (the experience rate parameter) and P o (the price or cost of the first unit of production), are obtained by fitting the model to the data. DOE notes that the cumulative shipments on the right hand side of the equation can have a dependence on price, so there is an issue with simultaneity where the independent variable is not truly independent. DOE’s use of a simple least squares fit is equivalent to an assumption of no significant first price elasticity effects in the cumulative shipments variable.

The parameter values obtained are:

P o = 13

. 18

− 3

. 02 + 3

. 92 (95% confidence), and b = 0.527±0.056 (95% confidence).

For warm air furnaces, the estimated experience rate (defined as the fractional reduction in price expected from each doubling of cumulative production) is 30

. 6

− 2

. 7 + 2

. 6 % (95% confidence).

DOE then derived a price factor index, with 2010 equal to 1, to forecast prices in each future year in the analysis period. The index value in a given year is a function of the LR and the cumulative production forecast through t hat year. DOE applied the same value to forecast prices for each furnace fan product class at each considered efficiency level. y = 13.184x

- 0.527 R2 = 0.954

0.8 0.9 1.0 1.1 1.2 1.3 1.4

60 80 100 120 140 160Relative Price (2010=1)

Cumulative Shipments (millions) Historical

Learning Fit10

- C

- 4 10

- C.3 N ET PRESENT VALUE RESULTS USING ALTERN ATIVE PRODUCT PRICE TREND

This section presents the NPV results using the alternative product price forecast for each key product class. For non

- weatherized gas furnace fans, it also compares the NPV using the default product price forecast with the NPV using the alternative product price forecast

.

Table 10

- C.3.1 NPV Using Alternative Pr oduct Price Forecast , Discounted at 3 Percent, for Furnace Fans Used in HVAC Products Other than Hydronic Air Handlers (billion 2011$) Key Product Class Candidate Standard Level 1 2 3 4 5 Improved PSC PSC w/ Controls X13 ECM ECM + Backward

- curved Impeller Non

- weatherized, Non

- condensing Gas Furnace Fan 0.113 0.077 4.536 0.865 1.776

Non

- weatherized, Condensing Gas Furnace Fan 0.257 1.584 4.516 0.498 1.481

Weatherized Gas Furnace Fan 0.007 0.087 0.854 0.439 0.657 Oil Furnace Fan 0.024 0.206 0.145

- 0.016

- 0.032 Electric Furnace / Modular Blower Fan 0.010

- 0.110 0.610

- 0.461

- 0.276

Manufactured Home Non

weatherized, Non

- condensing Gas Furnace Fan 0.003 0.024 0.049

- 0.044

- 0.048

Manufactured Home Non

weatherized, Condensing Gas Furnace Fan 0.005 0.036 0.049

- 0.084

- 0.101

Manufactured Home Electric Furnace / Modular Blower Fan - 0.001 0.011 0.042

- 0.075

- 0.02710

- C

- 5 Table 10

- C.3.2 Comparison of NPV Under Alternative Product Price Forecasts , Discounted at 3 Percent, for Furnace Fans Used in Non

- Weatherized Gas Furnaces (billion 2011$) Candidate Standard Level 1 2 3 4 5 Improved PSC PSC w/ Controls X13 ECM ECM + Backward

- curved Impeller Non

- weatherized, Non

- condensing Gas Furnace Fan Default Price Trend 0.110 0.048 4.462 0.551 1.395 Price Trend Based on Experience

Curve for Furnaces 0.113 0.077 4.536 0.865 1.776

Non

- weatherized, Condensing Gas Furnace Fan Default Price Trend 0.254 1.559 4.449 0.089 0.944 Price Trend Based on Experience

Curve for Furnaces 0.257 1.584 4.516 0.498 1.481

Table 10

- C.3.3 NPV Using Alternative Product Price Forecast , Discounted at 7 Percent, for Furnace Fans Used in HVAC Products Other than Hydronic Air Handlers (billion 2011$) Key Product Class Candidate Standard Level 1 2 3 4 5 Improved PSC PSC w/ Controls X13 ECM ECM + Backward

- curved Impeller Non

- weatherized, Non

- condensing Gas Furnace Fan 0.037

- 0.021 1.587

- 0.138 0.091

Non

- weatherized, Condensing Gas Furnace Fan 0.096 0.575 1.650

- 0.323

- 0.155

Weatherized Gas Furnace Fan 0.002 0.030 0.346 0.107 0.166 Oil Furnace Fan 0.008 0.071 0.040

- 0.039

- 0.052 Electric Furnace / Modular Blower Fan 0.003

- 0.055 0.233

- 0.301

- 0.272 Manufactured Home Non

- weatherized, Non

- condensing Gas Furnace Fan 0.001 0.005 0.013

- 0.041

- 0.046

Manufactured Home Non

- weatherized, Condensing Gas Furnace Fan 0.002 0.013 0.017

- 0.058

- 0.070

Manufactured Home Electric Furnace / Modular Blower Fan - 0.001 0.000 0.011

- 0.064

- 0.04610

- C

- 6 Table 10

- C.3.4 Comparison of NPV Under Alternative Product Price Forecasts, Discounted at 7 Percent, for Furnace Fans Used in Non

- Weatherized Gas Furnaces (billion 2011$) Candidate Standard Level 1 2 3 4 5 Improved PSC PSC w/ Controls X13 ECM ECM + Backward

- curved Impeller Non

- weatherized, Non

- condensing Gas Furnace Fan Default Price Trend 0.037

- 0.021 1.587

- 0.138 0.091 Price Trend Based on Experience

Curve for Furnaces 0.037

- 0.029 1.566 0.206 0.412

Non

- weatherized, Condensing Gas Furnace Fan Default Price Trend 0.095 0.564 1.618

- 0.505

- 0.392 Price Trend Based on Experience

Curve for Furnaces 0.096 0.575 1.650

- 0.323

- 0.155